Finding, Using, and Profiting from Hard Money and Hard Money Lenders When Flipping Houses
Mike Collins
Hard Money is an interesting financial animal. It’s history is colorful to say the least. Born by the need for rehabbers to get access to funds when a property is in disrepair and which no bank would lend on, it has grown to a multi-billion dollar industry.
The early lenders were ex-real estate investors who had made a few dollars in real estate and then became lenders in their local area. Now the industry is rapidly moving toward larger financial institutions and even larger banks.
As a newer real estate investor, becoming familiar with how to work with hard money can be one of the most profitable things you can do early on. This is truly the information business. If you are able to secure a contract on a single family home (non-owner occupied) you may be able to borrow 100% of the purchase costs and even some or all of the fix up money and closing costs.
One of the most important, but often overlooked, benefits of working with a hard money lender like this is that someone with a vested interest in your success has agreed, by virtue of approving the loan, that you have a real deal. This can be such a huge bonus for the new person. It can force you to do your homework when contracting properties to buy.
Honestly properties that fit into the hard money parameters are some of the best real estate deals out there. So if you get a property approved for a hard money loan – congratulate yourself!
Some of the specifics you need to keep in mind when shopping for hard money are:
ARV
ARV stands for after repaired value. This number is important because the amount of money you can borrow is derived from what the property will sell for when you’re done with your repairs. So know your values. Know what completely renovated houses will sell for. Most hard money loans are based on 60 to 65% of the ARV. That means if you buy a property that will be worth $100,000 when the repairs are complete you will be able to borrow up to $65,000 from the lender. This could possibly even include the repair costs and closing costs if your contract to purchase is low enough.
I think it’s important to mention here that some people falsely believe that it is impossible to buy a house for less than 65% of what it would be worth fixed up. Remember this did not become a multi-billion dollar industry because the hard money lenders aren’t lending money. It is absolutely possible and done every day. So get out there and find a house…
Interest rate: While this is are rapidly becoming standardized there is still a lot of fluctuation in interest rate from lender to lender. Don’t get bogged down with the interest rate. The norm is between 12% and 18% or more in some states. While this sound preposterous compared to what a normal home loan interest is – think of it as access to capital. The money will only be out from three to six months You should look to pay what is now becoming the average which is 13% to 15%. But competition is forcing the rates as low as 11%
Points: Here’s where you do need to be concerned and do some shopping. Points vary from two, which is rare, to ten also rare these days but more common than you would think. The average these days is in the 4 to 6 point range. Now when you consider a point is one percent of the total loan amount just a $100,000 dollar loan could range in fees from $1,000 to TEN thousand dollars. Now that could cut into your profits.
There are other things to consider when shopping for hard money. One of the first things you need to check on is the availability of becoming pre-qualified. Does hard money lender have a process to get you prequalified for the loan? Also, will they issue a very important document to you call a “proof of funds” letter. This is very important as most banks and Realtors and even some sellers these days will require proof that you are able to fund the transaction.
Second is the pre-payment penalty. You’ll want to look into this. Most hard money lenders don’t have one any more because they realize the loan is just for a short time, but still - ask the question! Some actually do have time limits like six months or a year in which time the loan needs to be re-paid but they usually offer a payment program to extend the loan longer. First off, you don’t want to have the loan out that long but if you do - you want to know your options.
Here’s the thing. Don’t let this process scare you. As I’ve stated above working with a lender like this is a good thing. You do your part and find a good, undervalued home to put a contract on. Then work with your lender to get the house approved. Remember you’ve already been pre-approved for the loan so use that proof of funds letter to get your first or next property.
Mike Collins is the founder and CEO of http://www.rehablist.com/ and http://www.rehabhardmoney.com/ He has been buying and selling houses and lending hard money for over twenty years.
Learn how to find, use and profit from the use of hard money and hard money lenders when dealing in fixer upper houses. If you're involved in flipping houses you need to know about hard money - where to find it and how to use it. We'll tell you all the benefit and the pitfalls to watch out for.
|